Many analysts said the next significant directional move in the G10 FX market would be a fall in the US dollar

Over the past time, we saw a plethora of central bank meetings but we doubt that these are going to break the market out of its torpor. ECB meeting weighed on the euro as the ECB hinted that its rate hike might be the last in this cycle. But the slide was modest and it seems unlikely that this week’s meetings at the likes the Fed, Bank of England and Bank of Japan, produce much more volatility.

Many analysts said the next significant directional move in the G10 FX market would be a fall in the US dollar, but this will only happen when the Fed changes the monetary policy narrative – and this probably won’t happen this week. For while, the ECB might have hinted that rates won’t rise any further it does not seem that the Fed can make a similar sort of “promise” this week.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy, suspected that the Fed won’t be in a position to materially change its position until the first half of next year and that could mean a considerable amount of time with the dollar tracking sideways. There are undoubtedly other factors that could have a bearing on currencies besides monetary policy. One of these is the sharp rise in oil prices since July. This is one factor that is starting to hurt the euro zone’s terms of trade relative to the US. The massive slump in the euro zone terms of trade relative to the US crushed the euro thanks to the dramatic surge in European gas prices. The subsequent fall in gas prices generated a recovery in the euro zone’s terms of trade – and a recovery in the euro.

The question now is whether this recent rise in energy prices is sufficient to generate a deep enough fall in the relative terms of trade to pull euro/dollar down towards, or even below, parity again. Mr. Steve Barrow’s inclination is to say that it is not. Instead, he thinks that euro/dollar is unlikely to diverge too far from a 1.05-1.10 range until next year when we look for a change in the Fed’s monetary policy narrative to start lifting the euro to the 1.20-1.30 range over the following year, or two. Many major central banks such as the Fed, ECB and BoE are able to set their monetary policies unencumbered by volatility in their currencies.

Dollar strength is not impinging on Fed policy and nor is euro and sterling weakness knocking the ECB and BoE out of their stride. But the situation is different for some other central banks that meet this week. Both the Bank of Japan and the Riksbank are tackling issues of currency weakness. In the Riksbank’s case, it seems very clear that currency weakness is not a function of central bank policy. Sharply higher interest rates would not lift the krona materially in Mr. Steve Barrow’s view; they may even make the outlook worse given that vulnerabilities in terms of the property sector and high household debt appear to be the catalysts for the krona’s travails.

In the case of the yen, it does appear more likely that monetary policy is to blame as the weakness has been particularly marked through the past 18- months, or so that other G10 central banks have been hiking rates while the BoJ has stood still. There are signs that the narrative from the BoJ is changing with Governor Ueda recently talking about the prospects for ending the period of negative short-term rates that has been in place since 2016. While such a move would probably be of some support to the yen, the yen has suffered decades of declines in real effective terms and hence pinning all the blame on the last seven-plus years of negative policy rates appears somewhat disingenuous.

For a start, the slide in the yen seems more closely related to the relative fall in Japan’s stock market than what has been happening to monetary policy and yields and this, in turn, reflects the relative weakness of the economy. This being said, more recent economic signs have been better and the stock market has reflected this too. So far, the yen has not benefited but Mr. Steve Barrow thinks it will in time. Add to this, the prospect of higher Japanese rates – and lower US policy rates next year – and dollar/yen is more likely to head for the 120-130 range than surge dramatically above the 150 level.